Posted: 11-7-24 | Innovia Wealth
Innovia Planning Insights: Intrafamily Lending
At Innovia, we often talk about estate planning topics, ranging from making irrevocable gifts to charitable giving. One of the techniques that is often overlooked is intrafamily loans.
Intrafamily lending refers to the practice of borrowing and lending money between family members. This can take various forms, including loans for purchasing a home, funding education, or starting a business. A few of the reasons you might consider making an intrafamily loan are:
- Lower Costs:
- Reduced Interest Rates: You can offer a lower interest rate1 than traditional lenders, saving the borrower money on interest payments.
- No Fees: Intrafamily loans typically have fewer fees than bank loans, further reducing costs.
- Flexible Terms:
- Customizable Agreements: You can set repayment terms that suit both parties, such as longer repayment periods or flexible payment schedules.
- Adaptability: If the borrower’s financial situation changes, you can adjust the terms more easily than a traditional lender might allow.
- Support Family Members:
- Help with Major Purchases: You might want to assist a family member in purchasing a home, funding education, or starting a business.
- Emergency Assistance: Offering a loan can provide critical financial support during tough times.
- Potential Tax Benefits:
- Gift Tax Exemptions: If the interest rate is at or above the IRS’s applicable federal rate, you may avoid gift tax implications.
- Strengthening Family Bonds:
- Building Trust: Providing financial assistance can reinforce trust and support within the family.
- Encouraging Financial Literacy: Use the opportunity to teach family members about loans, budgeting, and repayment.
- Investment Opportunities:
- Return on Investment: If the loan helps a family member succeed, the lender might see a return on their “investment” through interest payments or increased family wealth.
- Simplified Process:
- Less Bureaucracy: The loan process can be simpler and faster without the need for extensive paperwork or credit checks.
While intrafamily loans can be beneficial, it is important to approach them carefully, ensuring clear communication and documentation to avoid misunderstandings and potential strains on relationships.
Please contact your Innovia Wealth Advisor if you would like more information on Intrafamily lending.
1The IRS provides the Applicable Federal Rate (AFR) monthly. This is the minimum interest rate set by the IRS that must be charged on loans to avoid tax implications. If the interest charged on a loan is below the AFR, the difference between the interest charged and the AFR may be considered a gift for tax purposes. This can result in gift tax implications for the lender.
Market Dynamics
October—worse for bonds than stocks
Last month we witnessed good economic news with stronger than expected labor markets, robust retail sales and lower inflation. Despite the strong economy, stocks declined around 1% on concerns about growth trends in the largest technology companies. Bonds fared poorly as well—falling around 2.5%—as strong economic numbers led investors to think the Federal Reserve will not cut near-term interest rates aggressively. Long-term interest rates increased slightly due to election year rhetoric as both candidates promise to spend more and tax less, which would increase the budget deficit and government debt. The 10-year Treasury yield is up more than it has been historically after the Federal Reserve started cutting interest rates. On the one hand this is a sign of strong economic growth; on the other it is an indicator of a potential higher inflationary environment. If it turns out to be inflation, that will bode poorly for stocks and bonds. But if it turns out to be strong economic growth then equities will likely continue to do well, and fixed income will stabilize around today’s yields.
The recent rise in bond yields is normal, but future levels depend on growth and inflation.
November—all eyes on the election
November has historically been a positive month for equities, and election years tend to exaggerate this pattern as a relief from uncertainty buoys market participants. Over the long-term, investors tend to prefer gridlock in Washington (see graphic below). That may be because divided power makes it difficult to make sweeping changes, and markets prefer stability and predictability above all else. We would note that this has been one of the best years for equities in an election year since World War II. Market participants are clearly not that worried about election outcomes.
Investors tend to like gridlock.
Beyond the election, investors are focused on what the Federal Reserve will do with interest rates and how corporate earnings will develop. The Fed is expected to cut rates two more times this year and three times next year for a 1.25% total reduction in short-term interest rates. This would benefit the economy through lower borrowing costs and higher home sales activity. Investors are even more focused on corporate earnings, and particularly on large technology companies. The expectations behind artificial intelligence (AI) and the microchip, software, and energy sales required to support it are top of mind. Investors have recently gotten another glimpse into revenue growth and spending plans from Apple, Amazon, Google, Microsoft, and Meta (Facebook) and how this impacts market darling, NVIDIA. Investors will ponder these reports and position portfolios accordingly, which will fuel equity market outcomes going forward.
We continue to favor balanced allocations between fixed income, public equity, and private markets to match investor goals. Fixed income tends to provide cash for near-term spending needs and downside protection in case of recession. We like exposures to mortgage and corporate bonds that provide better than average yields and have been considering extending maturities on higher interest rates. Equity provides growth both to meet future spending and protect against inflation and longevity risk. We like our balance between growth and value as well as our exposure to small and international stocks. We are still avoiding emerging market exposures but have been watching developments in China with interest. We continue to seek unique private market exposures from credit, real estate, infrastructure, and equity opportunities. We are uncovering savvy managers and special offerings that look promising.
Private Markets Pulse
Changing Roles of Public and Private Markets: Public and private markets are increasingly converging, with more companies opting to remain private even as they grow to larger scales. Currently, 86% of U.S. firms with over $100 million in revenue are private, demonstrating a significant shift in where major business activity occurs. This trend reflects growing liquidity in private markets, allowing private companies to raise substantial capital without public listings
.
Source: Apollo Chief Economist
Risk in Public and Private Markets: Risk is present in both public and private markets, but it takes different forms. In public markets, elevated levels of concentration in a handful of large tech firms introduces risk. Private markets face distinct risks, like illiquidity, but they also offer more controlled environments for companies to grow without quarterly earnings pressures.
Source: Apollo Chief Economist